Health care reform requires employers to calculate and report the aggregate cost of applicable employer-sponsored health insurance coverage on employees’ Form W-2s. Although the new rule applies for employees’ tax years beginning after Dec. 31, 2010, payroll systems need to be updated for this change by January 2011. This deadline is imposed because employees are entitled to request their Form W-2s early if they terminate employment during the year.
As a result of this requirement, most Form W-2s for tax year 2011 will be issued in January 2012. Form W-2s reflecting the new health insurance information must be available no later than Feb. 1, 2011, in the event that an employee requests one.
Plans for which coverage costs must be reported under the new requirement include:
- Medical plans.
- Prescription drug plans.
- Executive physicals.
- On-site clinics if they provide more than de minimus care.
- Medicare supplemental policies.
- Employee assistance programs.
Coverage under dental and vision plans is included unless they are “stand-alone” plans. However, the cost of coverage under health flexible spending accounts, health savings accounts and specific disease or hospital/fixed indemnity plans is excluded from the reporting requirement.
How to Value Plans
The aggregate cost of coverage under the plans (including the employee and employer portions of cost) is determined under rules similar to COBRA – minus the 2 percent administrative charge permitted under COBRA. Government regulations regarding how to value plans for COBRA purposes were, as of this writing, expected shortly. Presumably, any regulations issued would apply to COBRA and to the new Form W-2 reporting requirements. One challenge for employers might be that some of the plans covered by the new reporting requirement, such as on-site medical clinics, are not plans that they have previously valued for COBRA purposes. Now, employers will need to come up with reportable values for coverage provided under these programs.
The new reporting requirement appears to require a monthly calculation of coverage. However, some employees might have less than a month’s coverage if their coverage starts or stops during the month. Future regulations might clarify how to report coverage of less than a full month.
Reporting is required for employees but also seems to apply to former employees who are provided with health coverage, including early retirees, retirees, terminated employees on COBRA and surviving spouses. Many of these individuals would not typically receive a Form W-2 from the employer, at least not for taxable years following their termination of employment. Accordingly, if this interpretation is correct, an employer’s overall W-2 reporting requirements may increase dramatically. Employers should begin working with their payroll departments immediately to ensure compliance with these new requirements.
If you have any specific questions about implementation, please contact us as soon as possible to discuss these significant health care reform changes.